International Trade Theories

Mercantilism is an economic theory, considered to be a form of economic nationalism that holds that the prosperity of a nation is dependent upon its supply of capital, and that the global volume of international trade is "unchangeable". Economic assets (or capital) are represented by bullion (gold, silver, and trade value) held by the state, which is best increased through a positive balance of trade with other nations (exports minus imports).

Principle of absolute advantage refers to the ability of a party (an individual, or firm, or country) to produce more of a good or service than competitors, using the same amount of resources. Countries should produce those goods in which they have absolute advantage.

The law of comparative advantage refers to the ability of a party (an individual, a firm, or a country) to produce a particular good or service at a lower opportunity cost than another party. It is the ability to produce a product most efficiently given all the other products that could be produced. “Abilities are compared and if other countries are efficient in production of some goods you should not produce that rather switch to other product.” Assume that no difference in currency value and factor of production are movable.

The Heckscher–Ohlin theorem: "A capital-abundant country will export the capital-intensive good, while the labor-abundant country will export the labor-intensive good."

The product life-cycle theory suggests early in a product’s life-cycle all the parts and labor associated with that product come from the area in which it was invented. After the product becomes adopted and used in the world markets, production gradually moves away from the point of origin. In some situations, the product becomes an item that is imported by its original country of invention.

New Trade Theory (NTT) is a collection of economic models in international trade which focuses on the role of increasing economies of scale and network effects (words of mouth).

The Diamond model of Michael Porter for the Competitive Advantage of Nations offers a model that can help understand the competitive position of a nation in global competition. This model can also be used for other major geographic regions.

These interlinked advanced factors for Competitive Advantage for countries or regions in Porters Diamond framework are:

1. Firm Strategy, Structure and Rivalry (The world is dominated by dynamic conditions, and it is direct competition that impels firms to work for increases in productivity and innovation)

2. Demand Conditions (The more demanding the customers in an economy, the greater the pressure facing firms to constantly improve their competitiveness via innovative products, through high quality, etc)

3. Related Supporting Industries (Spatial proximity of upstream or downstream industries facilitates the exchange of information and promotes a continuous exchange of ideas and innovations)

4. Factor Conditions (Contrary to conventional wisdom, Porter argues that the "key" factors of production (or specialized factors) are created, not inherited. Specialized factors of production are skilled labor, capital and infrastructure.

Factor Endowment is commonly understood as the amount of land, labor, capital, and entrepreneurship that a country possesses and can exploit for manufacturing.

Instruments of Trade Policy: 1) Tariffs 2) Subsidies 3) Import Quotas & voluntary export restraints 4) Local content requirement 5) administrative policies 6) Anti-dumping policies

Foreign direct investment (FDI) refers to long term participation by country A into country B. It usually involves participation in management, joint-venture, transfer of technology and "know-how". There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow.

Horizontal FDI is FDI in the same industry abroad as that in which a firm operates at home.

Vertical FDI is FDI in associated industries in the chain of vertical integration.

Factors for FDI: 1) Transportation Cost 2) Market Imperfection 3) Strategic Behavior 4) Product Life Cycle 5) Location Advantage

Radical View: MNEs are coming to just extract the profits from the host country and they won’t return anything. Keep the developing or under-developed countries as they are.

Free Market View: MNEs should produce in other countries to balance the production.

Pragmatic Nationalism: There are some benefits & cost for both counties.

Political Economy

Socialism is a philosophy that encompasses various theories of economic organization which advocate either public or direct worker ownership and administration of the means of production and allocation of resources.

Capitalism is an economic system where capital and land, the non-labor factors of production (also known as the means of production), are privately owned; labor, goods and resources are traded in markets; and profit, is distributed to the owners invested in technologies and industries. The pervasiveness of wage labor is another important feature of capitalism, which depends on non-labor income derived from property not intended for the owner’s personal use. Also see rise of financial capitalism, which controls all other forms of capitalism.

Democracy is a political government carried out either directly by the people (direct democracy) or by means of elected representatives of the people (Representative democracy). The definition includes: equality and freedom. These principles are reflected in all citizens being equal before the law and having equal access to power. And the freedom of its citizens is secured by legitimized rights and liberties which are generally protected by a constitution.

Communism is a social structure in which classes are abolished and property is commonly controlled, as well as a political philosophy and social movement that advocates and aims to create such a society.

Pure communism in the Marxian sense refers to a classless, stateless and oppression-free society where decisions on what to produce and what policies to pursue are made democratically, allowing every member of society to participate in the decision-making process in both the political and economic spheres of life.

A communist state is a sovereign state with a form of government characterized by single-party rule or dominant-party rule of a communist party and a professed allegiance to a communist ideology as the guiding principle of the state.

Theocracy is a form of government in which a god or deity is recognized as the state’s supreme civil ruler, or in a higher sense, a form of government in which a state is governed by immediate divine guidance or by officials who are regarded as divinely guided.

In politics, right-wing and the Right are generally used to describe support for social stratification, the preservation of social order, and upholding traditional values.

Collectivism is a term used to describe any moral, political, or social outlook that emphasizes the interdependence of every human in some collective group and the priority of group goals over individual goals. Collectivists focus on community and society, and seek to give priority to group rights over individual rights.

Individualism is the moral stance, political philosophy, ideology, or social outlook that stresses "the moral worth of the individual". Individualists promote the exercise of one’s goals and desires and so independence and self-reliance while opposing most external interference upon one’s own interests, whether by society, or any other group or institution.

A market economy is economy based on the power of division of labor in which the prices of goods and services are determined in a free price system set by supply and demand.

Planned economy (or command economy) is an economic system in which the state or workers’ councils manage the economy. It is an economic system in which the central government makes all decisions on the production and consumption of goods and services. Its most extensive form is referred to as a command economy, centrally planned economy, or command and control economy. In such economies, central economic planning by the state or government controls all major sectors of the economy and formulates all decisions about the use of resources and the distribution of output. Planners decide what should be produced and direct lower-level enterprises to produce those goods in accordance with national and social objectives.

A mixed economy is an economic system that includes a variety of private and government control, or a mixture of capitalism and socialism. It includes: a degree of private economic freedom (including privately owned industry) intermingled with centralized economic planning and government regulation (which may include regulation of the market for environmental concerns, social welfare or efficiency, or state ownership and management of some of the means of production for national or social objectives).

Common law is law developed by judges through decisions of courts and similar tribunals (also called case law), rather than through legislative statutes or executive branch action. A "common law system" is a legal system that gives great precedential weight to common law, on the principle that it is unfair to treat similar facts differently on different occasions. The body of precedent is called "common law" and it binds future decisions. In cases where the parties disagree on what the law is, an idealized common law court looks to past precedential decisions of relevant courts. If a similar dispute has been resolved in the past, the court is bound to follow the reasoning used in the prior decision (this principle is known as stare decisis). If, however, the court finds that the current dispute is fundamentally distinct from all previous cases (called a "matter of first impression"), judges have the authority and duty to make law by creating precedent. Thereafter, the new decision becomes precedent, and will bind future courts.

Civil law is a legal system inspired by Roman law, the primary feature of which is that laws are written into a collection, codified, and not (as in common law) determined by judges. The principle of civil law is to provide all citizens with an accessible and written collection of the laws which apply to them and which judges must follow. It is the most prevalent and oldest surviving legal system in the world.

Culture & Ethics


Culture is the set of shared attitudes, values, goals, and practices that characterizes an institution, organization or group or country.

Determinants of Culture

1) Social Structure

2) Religion and Ethical System

3) Language

4) Education

5) Economic and Political Philosophy

6) Culture and Workplace

Power distance

Power distance is the extent to which less powerful members of institutions and organizations within a country expect and accept that power is distributed unequally.


Uncertainty is “the extent to which the members of a culture fell threatened by uncertain or unknown situations.”


Ethics (also known as moral philosophy) is a branch of philosophy which seeks to address questions about morality; that is, about concepts such as good and bad, the noble and the ignoble, right and wrong, justice, and virtue.

Ethics in International Business

1) Employment Practices

1.1) working environment
1.2) wage rate
1.3) job hours

2) Human Rights

2.1) freedom of association
2.2) freedom of speech
2.3) freedom of movement

3) Environmental Pollution

3.1) factory area
3.2) use of material
3.3) handling waste
3.4) safety measures
3.5) action for improvement

4) Corruption

5) Moral obligations

Roots of Unethical Behavior

1) Personal Ethics

2) Organizational Culture

3) Leadership

4) Unrealistic Performance Goals

5) Decision Making Process

Philosophical approaches to ethics

The Friedman Doctrine: company’s only responsibility is to increase its profits. Friedman argued that a company should have no “social responsibility” to the public or society because its only concern is to increase profits for itself and for its shareholders.

Cultural relativism is the principle that an individual human’s beliefs and activities should be understood in terms of his or her own culture.

Righteous Moralist: A righteous moralist claims that a multinational’s home-country standards of ethics are the appropriate ones for companies to follow in foreign countries.

A naive immoralist asserts that if a manager of a multinational sees that firms from other nations are not following ethical norms in a host nation, that manager should not either.

Utilitarian & Kantian approaches to ethics hold that the moral worth of actions or practices is determined by their consequences.

Rights theories recognize that human beings have fundamental rights and privileges that transcend national boundaries and cultures. Rights establish a minimum level of morally acceptable behavior.

Justice theories focus on the attainment of a just distribution of economic goods and services. A just distribution is one that is considered fair and equitable.